Grafton Group Regulatory News (GFTU)

Grafton Group plc

Final Results for the Year Ended 31 December 2019

1 Supplementary financial information in relation to Alternative Performance Measures (APMs) is set out on pages 42 to 53.

2 A bridge between the pre IFRS 16 and the related IFRS impact is set out within the APM's and detail is also in Note 20.

3 2018 has been restated as Plumbase and the Belgium Merchanting business are classified as discontinued operations. Details are set out in the APM's.

4 Change relates to 2019 v 2018 pre any IFRS 16 "Leases" impact.

5 The term "Adjusted" means before exceptional items and amortisation of intangible assets arising on acquisitions in both years.

Highlights

·; Revenue in continuing operations up 3% to £2.7 billion - 2.9% growth in constant currency

·; Operating profit in continuing operations up 4% to £194.3 million on a pre-IFRS 16 basis

·; Strong organic growth in Merchanting and Retailing businesses in Ireland

·; Significant growth in profitability in Netherlands business and increase in scale with Polvo acquisition

·; Softer trading in UK merchanting business, particularly in H2 on weaker economy and RMI market

·; Reshaped our portfolio with successful disposal of Plumbase and Belgian Merchanting business

·; Strong pre-IFRS 16 cash flow from operations of £219.1 million (2018: £209.2 million) and net cash of £7.8m at year end

·; 6% increase in total dividend to 19.00p is consistent with progressive dividend policy

·; Implementation of IFRS 16 standard on accounting for leases has no economic impact on Group but has changed the measurement of many aspects of the Group's accounts

Gavin Slark, Chief Executive Officer commented:

"2019 saw growth in revenue, profitability and earnings per share alongside continuing progress in evolving and re-shaping our businesses to enhance our value proposition to our customers and drive sustainable growth for our shareholders. Strong organic growth in our Merchanting and Retailing operations in Ireland and in the profitability of our Netherlands operations helped offset a challenging year in the UK due to political and economic uncertainty.

"The outlook for 2020 is of continuing but moderating growth in Ireland and the Netherlands and while reduced uncertainty may lead to some uplift in the UK RMI market, we remain cautious about the speed of any recovery. Given the strength of our brands we look forward to another year of progress for Grafton and with a strong balance sheet and rigorous financial discipline we are well placed to capitalise on growth opportunities."

Webcast Details

An analysts and investors results presentation will be hosted by Gavin Slark and David Arnold at 8.30am (GMT) today 27 February 2020 at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS. A live webcast will be available on https://www.graftonplc.com/investors/grafton-group-final-results-2019/ and we recommend you register in advance. A recording of this webcast will also be available to replay later in the day. The results presentation can be viewed/downloaded at http://www.graftonplc.com

Enquiries:

Grafton Group plc + 353 1 216 0600

Gavin Slark, Chief Executive Officer

David Arnold, Chief Financial Officer

Murray + 353 1 498 0300

Pat Walsh

MHP Communications + 44 20 3128 8549

Tim Rowntree / Rachel Mann

Cautionary Statement

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by these forward looking statements. They appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of Directors and senior management concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and the businesses operated by the Group. The Directors do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

Final Results

For the Year Ended 31 December 2019

Group Results

Grafton is pleased to report on a year of further growth and delivery of a number of strategic objectives to improve the quality and sustainability of the Group's earnings and create long term value for shareholders.

The Merchanting and Retailing businesses in Ireland delivered a very good performance increasing operating profit by 9.3 per cent in constant currency. Operating profit advanced strongly in the Netherlands merchanting business with constant currency growth of 24.3 per cent. The Group was not immune to weakness in the UK economy in what was the most challenging year for the merchanting market since the global financial crisis and operating profit in continuing operations was marginally down on the prior year.

Merchanting

Volumes in the UK merchanting business were affected by weakening demand as the year progressed. Households deferred discretionary spending on home improvement projects due to a decline in sentiment and increased uncertainty about the outlook for the economy and housing market. The overall UK merchanting business reported a small increase in average daily like-for-like revenue. The Selco business was resilient but it was impacted by the weaker trading conditions. Lower average daily like-for-like revenue and pressure on gross margins in a very competitive market contributed to a decline in profitability in Buildbase.

Revenue in the Group's market leading merchanting business in Ireland has increased substantially over the past five years and this trend continued in 2019 albeit at a slower pace in the second half as households responded more cautiously to a weaker international outlook. Revenue growth was driven by higher volumes in the residential RMI market and a continuation of the gradual recovery in house building.

The Netherlands business experienced a softening of the strong growth trends of recent years particularly in the second half of the year as the economy and construction sector slowed. The business consolidated its leadership position in the ironmongery, tools and fixings segment of the merchanting market with the acquisition of the 51 branch Polvo business in July. Strong growth in operating profit in a weaker market was attributed to positive gross margin trends, integration benefits from acquisitions made in prior years and a second half contribution from the Polvo acquisition.

Retailing

Woodie's market leading DIY, Home and Garden business in Ireland achieved a standout performance as it continued to make strong revenue gains from the business transformation initiatives of recent years including a significant investment in the store network, the introduction of higher quality product ranges and delivery of excellent customer service.

Manufacturing

CPI EuroMix, the market leading mortar manufacturing business in Great Britain, reported a small decline in operating profit compared to the exceptional growth and outperformance reported for 2018 in a market where long term demand is underpinned by a shortage of housing.

Discontinued Operations

We continued to actively manage our portfolio of businesses with the successful disposal of Plumbase and the Belgian Merchanting business in October. These disposals were in line with our strategy of focusing investment into businesses with good long-term growth prospects that generate high returns.

We conducted a strategic review of our operations in Belgium in the context of its future growth prospects that led to a decision to sell the business. The impact on the income statement of the disposal is an exceptional charge of £29.4 million that is included in the result from discontinued operations.

Property Profit

The Group realised a profit of £6.9 million (2018: £4.9 million) and cash proceeds of £15.6 million from the disposal of surplus properties in Ireland and the UK.

Cash Flow

The Group continued to be very cash generative with pre-IFRS 16 cashflow from operations of £219.1 million (2018: £209.2 million). The Group had pre-IFRS 16 net cash of £7.8 million on the balance sheet at the year-end having started the year with net debt of £53.1 million.

Dividend

A second interim dividend of 12.5p (2018: 12.0p) will be paid to give total dividends for the year of 19.0p representing an increase of 5.6 per cent on dividends of 18.0p paid for 2018. This increase is in line with the Board's progressive dividend policy and reflects both the Group's strong cashflow from operations for the year and its pre-IFRS 16 net cash position at the year end. Dividend cover was 3.5 times (2018: 3.5 times).

Board

Dr. Rosheen McGuckian was appointed as a Non-Executive Director with effect from 1 January 2020. The Board will benefit greatly from Rosheen's extensive business knowledge, experience and track record in Executive and Non-Executive Director roles in Ireland and we look forward to working with her over the coming years.

Sustainability Strategy

The Group is mindful of its corporate and social responsibilities and good progress was made during the year on the development of a Group sustainability strategy. The objective of this strategy is to build a sustainable future for everyone. This strategy is aligned with the UN Sustainable Development Goals and it identifies five key areas of focus and activity for the Group and its businesses being Customers and Products; People; Resources; Communities; and Ethics. Further work will be carried out during 2020 to implement this strategy. In addition, several of our businesses have implemented wellness initiatives to support our colleagues in their work and personal lives.

Outlook

We expect the UK housing market to benefit from reduced uncertainty, healthy labour market conditions and low interest rates. We remain cautious however at this stage about the speed of any recovery in the RMI market which may take time to gain traction.

The outlook for the Irish economy continues to be favourable with some moderation in growth anticipated from the high levels of recent years. Growth in domestic demand is expected to be driven by gains in employment and incomes which should be positive for our merchanting and DIY businesses. Growth in house building is likely to be constrained by affordability relative to incomes and availability of mortgage finance.

Growth in the Netherlands economy is forecast to continue to moderate due to weaker exports while domestic demand is expected to be supported by tax cuts and growth in real wages. Despite a shortage of homes and an increase in household formations, house building is expected to reduce due to more onerous environmental requirements and a decline in the issue of building permits last year. The acquisition of Polvo provides an opportunity to realise integration benefits in the enlarged business.

Average daily like-for-like Group revenue decreased by 0.4 per cent in the period from 1 January to 23 February. This comprises a decline of 1.5 per cent in UK Merchanting, growth of 2.0 per cent in Irish Merchanting, growth of 1.3 per cent in Netherlands merchanting, a decline of 0.3 per cent in Retailing and growth of 6.7 per cent in Manufacturing.

Our overall expectations are positive for our portfolio of strong cash generative businesses and we are confident of continued progress in 2020. We will continue to pursue our focused and disciplined growth strategy.

Operating Review - Continuing Operations

Merchanting Segment* (89% of Group Revenue)

* Excludes Plumbase and the Belgium Merchanting business

**Change represents the movement pre IFRS 16 adjustments

The merchanting businesses in the UK, Ireland and the Netherlands contributed 89 per cent of Group revenue (2018: 90 per cent). Overall average daily like-for-like revenue was up by 1.5 per cent with relatively small growth in the UK and Netherlands merchanting markets and good growth in Ireland.

UK Merchanting* 

* Excludes Plumbase business

**Change represents the movement pre IFRS 16 adjustments

The UK economy continued to slow through the year as weakness became more broadly based and consumer confidence dropped to its lowest level for five years. Growth in house prices was subdued with softer demand in London and the South East. Activity in the UK RMI market which is heavily linked to GDP growth, consumer confidence and transactions in the secondary housing market also weakened.

Against this backdrop, the UK merchanting business reported reasonable growth in average daily like-for-like revenue in the first half and this trend continued into July. In line with the weakness in the wider economy and the RMI market , trading weakened slightly in August and the deterioration in trading intensified in September and October before stabilising towards the end of the year. Overall average daily like-for-like revenue for the year increased by 0.5 per cent (£8.3 million) with materials price inflation of circa 2.0 per cent more than offsetting a circa 1.5 per cent decline in volumes.

New branches which were principally Selco generated revenue growth of 0.8 per cent (£14.5 million) and the Leyland SDM acquisition contributed incremental revenue growth of 0.3 per cent (£6.1million). The disposal of two small non-core businesses and branch consolidations reduced revenue by 2.7 per cent (£47.5 million).

The combined effect of relatively flat revenue in the like-for-like business, gross margin pressure in a very competitive market and cost increases in the ordinary course of business led to a decline in the adjusted operating profit margin before property profit of 30 basis points to 5.7 per cent. Lower property profit contributed to a further 10 basis points decline in the margin for adjusted operating profit including property profit.

Selco Builders Warehouse reported marginal growth in both average daily like-for-like and total revenue. The year started favourably with a good level of growth in the first quarter. Growth eased in the second quarter and was marginally down in the third quarter. The decline intensified at the start of the fourth quarter but trading ended the year on a firmer note. The decline in housing transactions and house prices contributed to weakness in the housing RMI market in London which accounted for 71 per cent of revenue.

Selco's annual revenue was in excess of £0.5 billion and its unique retail style, easy-to-use, self-select, modern warehouse model proved resilient in a weaker market reflecting the benefits of its diversified customer base of generalist and specialist trades people who are primarily focused on projects in the residential RMI market.

Operating profit was marginally lower due to the weaker volumes, investing in more competitive pricing in core heavyside products and completion of a number of strategic and productivity focused initiatives while keeping tight control of the cost base. The large and very profitable branch in Cricklewood was successfully relocated at the end of its lease in December 2018.

A new branch was opened in Kingston-Upon-Thames at the end of November increasing the estate to 67 including 39 branches in London. Development plans for the current year will see Selco open new branches in Orpington and Salford, relocate the Bristol branch and expand capacity in the Chessington branch. Five of the long-established branches in the estate were upgraded as part of a rolling investment programme that will continue in the current year.

We continue to see opportunities for selective expansion of the Selco footprint and, in view of the weaker RMI market in recent years, the business also has a structural growth opportunity to increase revenue and profitability in the 31 branches that were opened between 2016 and 2018.

The new delivery-hub that opened in April in Edmonton successfully centralised deliveries for six branches in North East London, increased the utilisation rate of delivery vehicles and freed up capacity in these branches to provide an enhanced experience for customers. Since the year end, a new distribution centre was opened in Oxford in conjunction with an experienced logistics partner who will provide warehousing and branch fulfilment services for 6,000 lightside products. This will enable Selco to generate savings from purchasing products in greater volume, increase branch capacity and improve productivity.

The new "Click 'N' Deliver" service introduced in April for bulky building materials was well received by customers and complements the existing Click & Collect service.

Leyland SDM, the largest specialist decorators' merchant in London that trades from a unique portfolio of high street locations in the city, performed strongly despite flat market conditions. The business was acquired in February 2018 and made an incremental contribution to operating profit in 2019. Procurement gains made a significant contribution to the result for the year and the operating profit margin was well ahead of the pre-acquisition level. The Camden, London Bridge and Shoreditch branches were upgraded and the first new branches under Grafton ownership were opened in Maida Vale and Streatham and we continue our search for opportunities to grow the branch network in London.

Buildbase had an encouraging start to the year with strong growth in average daily like-for-like revenue in the first quarter. Trading conditions started to weaken in the second quarter and the rate of decline on the prior year intensified through to the year end. Subdued economic growth and political uncertainty contributed to weak consumer sentiment leading households to hold off on spending on RMI projects. Lower volumes and more competitive pricing resulted in a reduction in operating profit. The business moved to address its cost base and is now better positioned to take advantage of evolving market conditions.

The back-office modules of the new ERP system were successfully implemented and the first branches have gone live with rollout to the entire estate scheduled to occur on a phased basis over the next 12 to 18 months.

Civils & Lintels, a distributor of heavyside building materials, increased revenue and profitability from supporting its groundworks and civils sub-contractor customer base who operate in the new housing market. It also made gains in the distribution of steel and concrete lintels where it has a market leadership position. The new Leeds branch that opened in 2018 performed strongly growing market share in the North of England.

In Scotland, the Buildbase branches were carved out and together with PDM, the market leader in the Civils market, now trade as PDM Buildbase Scotland. This streamlined business has seen a marked improvement in performance and provides a strong foundation for future growth in the region.

MacBlair, the Northern Ireland merchanting business, reported modest growth in revenue with a strong performance in the provincial branches more than offsetting weakness in the Belfast area branches. Modest revenue growth, targeted product mix improvements, procurement gains and tight cost control combined to deliver an excellent set of results for the year most notably a record operating profit margin.

TG Lynes, a leading distributor of commercial pipes and fittings in London, made further gains despite encountering tougher trading conditions than experienced in recent years. Revenue growth was mainly sustained by existing projects as uncertainty about the outlook for the economy delayed investment decisions. An increase in revenue and operating profit marked the fifth consecutive year of growth since the business was acquired by Grafton in early 2015.

Irish Merchanting 

* Change represents the movement pre IFRS 16 adjustments

The merchanting business in Ireland continued to grow and extend its competitive advantage. The focus on organic growth and using the branch estate to leverage the structural growth opportunity that has been a feature of the market in recent years saw like-for-like revenue grow by 6.2 per cent in constant currency. The business performed very strongly in the first half with average daily like-for-like revenue growth of 8.3 per cent. While volumes recovered in the seasonally important month of November, international uncertainty saw a softening of trading and sentiment in the second half with like-for-like revenue growth of 4.2 per cent.

Revenue growth in 2019 benefitted from an increase in the supply of new housing with completions up 18 per cent to an estimated 21,200 units. Chadwicks branch network benefitted from strong growth in housing supply in the Midlands, the West and the Dublin commuter belt counties which alone account for a quarter of national housing building output. The construction of single homes and scheme houses grew by 13 per cent and accounted for over 80 per cent of units completed. This segment of the new build market generates greater demand through the merchanting market than apartment building which increased at a faster rate from a low base.

The completion of new houses continued to run well behind annual demand which is estimated at 35,000 units. On the basis of recent trends, it will take at least three years for annual supply and demand to be aligned and much longer for pent-up demand to be satisfied following a decade of under supply. The rate of growth in house prices softened to around one per cent nationally due to constrained affordability relative to incomes combined with tight regulatory oversight of mortgage lending.

Residential RMI, an end-use market that contributes more than half of revenue, continued to grow despite a small decline in housing transactions. This reflected weakness in Dublin that was concentrated at the top end of the market while growth continued in the remainder of the country. Activity in the non-residential end-use market was focused on supporting a range of infrastructure and leisure projects.

In September 2019, the business announced that all merchanting brands in Ireland except for three large destination branches would be aligned as Chadwicks with refreshed and updated branding. The Chadwicks brand has been in existence for more than a century in Ireland where it enjoys strong recognition and is synonymous with the merchanting of high-quality products, great service and product knowledge.

The rebranding is part of a programme of investment that will modernise and upgrade the branch network over a period of three years. Twelve branches were upgraded and rebranded during the year. A key first step in the rebranding was the successful migration in the first half of the entire branch network onto a single trading system from four discrete systems. This has provided customers with the flexibility to trade with all branches using a single account. This investment and modernisation programme is intended to provide a stronger platform to drive organic growth and increase the scale and competitive advantage of the business.

There was a small contraction in the gross margin due to competitive market conditions for delivered, higher volume transactions in the new build segment of the market. Growth in overheads was partly driven by the full year impact of the recruitment of 50 colleagues in 2018 and a further 29 in 2019 that included deepening the management resource available to lead the business during its next phase of growth and development.

Netherlands Merchanting 

* Change represents the movement pre IFRS 16 adjustments

2019 was a transformative year for the Netherlands business, a market that Grafton entered in 2015. The acquisition of the 51 branch Polvo business was completed in July and in August Isero relocated to a new distribution centre that doubled capacity and strengthened its supply chain and logistics functions. Rollout of the Isero ERP system to the 14 branch Amsterdam based Gunters en Meuser commenced and is on track to be completed in the first quarter of 2020. These developments are in line with our strategy to generate long term value in a market leading business where we see further integration benefits from our increased scale and other growth opportunities.

The backdrop to trading was positive as the Netherlands economy performed relatively well although it grew at a lower but stable pace compared to 2018 driven mainly by increased domestic spending. Housing transactions were unchanged having declined in 2018 and the rate of growth in average prices slowed to six per cent in a tight market with the number of houses for sale at an historically low level. Affordability improved due to lower fixed rate mortgages, higher incomes in a strong labour market and tax reductions. The supply of new houses however continued to lag strong demand due to the limited supply of land available for development and a shortage of skilled labour.

Average daily like-for-like revenue increased by 0.6 per cent in the established Isero business. Trading was uneven during the year with strong growth in the first half and an overall decline in the second half that incorporated more stable conditions in November and December when performance was in line with the prior year.

The impact of softer trading conditions in Isero, following three years of strong growth, was largely offset by procurement gains and integration benefits. Operating profit in the Isero business, excluding the Polvo acquisition, was very marginally ahead of 2018.

Polvo contributed revenue of £52.5 million and operating profit of £3.8 million, an operating margin of 7.2 per cent, in the six-month period under Grafton ownership. Polvo was successfully transitioned to the same buying Group as Isero at the year end to facilitate harmonisation of procurement terms. The Polvo branch locations are geographically complementary to the Isero branch network and the acquisition consolidates the Group's leadership position in this attractive segment of the Netherlands merchanting market.

Kooning, a single branch business located near Schiphol Airport that was acquired in November, strengthens our position in the complementary workwear and personal protective equipment market. The two single branch businesses acquired last year performed in line with expectations. Revenue growth in the branches that were opened last year in the cities of Almere and Dordrecht provided the business with an increased presence in these two important markets.

Five regional businesses that already traded as part of an integrated branch network were rebranded as Isero, the umbrella brand for these family brands, under a new logo, brand promise and corporate identity which creates a more unified business and identity for colleagues, customers and other stakeholders.

Grafton ended the year trading from 113 branches in the Netherlands compared to 62 at the end of 2018 .

Retail Segment (8% of Group Revenue)

* Change represents the movement pre IFRS 16 adjustments

2019 was the fourth consecutive year of strong growth in revenue and profitability for the Woodie's DIY, Home and Garden business in Ireland. The business gained significant momentum over this period supported by investment in the branch network and the introduction of new product ranges. A multi-year programme of investment in colleagues helped to deliver great service and an improved shopping experience for customers. Woodie's is the clear market leader in its sector and it continued to improve its position over the year relative to competitors.

Revenue growth across the thirty-five-branch estate increased from 2.9 per cent in the first half to 6.4 per cent in the second half. The first half performance compared to growth of 13.4 per cent in the prior year driven by exceptional demand for seasonal products. The economic backdrop was generally positive despite some softening of consumer sentiment as the year progressed. A rise in disposable income was sustained by wage growth that became more broadly based across most sectors and regions of the Irish economy.

The number of customer transactions increased by 1.5 per cent to over 8.4 million while an improvement in product ranges contributed to growth of 3.2 per cent in average transaction values.

Good revenue growth was achieved from market share gains in the garden products category and from the launch of a new lighting and textile ranges. The business continued to develop a strong presence in the kitchens market and ended the year with a strong performance in its Christmas category driven by range innovation.

On-line revenue grew by 51 per cent and contributed 1.5 per cent of total revenue, up from 1.1 per cent as more customers availed of the flexibility and choice in how they shop with Click & Collect a popular and convenient option for their changing needs.

Woodie's new format was rolled out in a further three stores increasing the number of stores upgraded to thirty. The upgraded stores contributed almost ninety per cent of annual revenue and a major redevelopment of the Sallynoggin store in South Dublin, which trades from a freehold property, is scheduled for the current year.

Woodie's improved its position in the Great Place to Work engagement survey for the fourth consecutive year making it one of Ireland's best workplaces benchmarked against major domestic and international businesses operating in Ireland. Woodie's also made a positive difference to the community raising €400,000 for four children's charities from running its "Heroes" campaign in stores across the country.

Earlier this month, Woodie's commenced transitioning to an upgrade of its established ERP system. This development is proceeding as planned and when completed in March 2020 will deliver the latest retail technology at the point of sale and an updated platform for the supply chain and financial management of the business.

Woodie's operates in a highly competitive market and maintained its gross margin in line with the prior year while investing in competitive prices and offering value for money to its customers. Overheads were very tightly controlled while continuing to drive growth of the business. Operating profit increased by 18.8 per cent to £19.9 million (2018: £16.8 million) and the operating profit margin increased by 120 basis points building on growth of 230 basis points in 2018 and 150 basis points in 2017.

Manufacturing Segment (3% of Group Revenue)

*Change represents the movement pre IFRS 16 adjustments

CPI EuroMix, the market leading mortar manufacturing business that operates nationally from ten plants in Great Britain, continued to benefit from its industry leading reputation for product quality and service in the dry mortar market. Mortar volumes supplied to the new housing market increased marginally while a small contraction in other segments of the market, from record levels of output in the prior year, was partly driven by the completion of a number of non-recurring projects.

Despite an increasingly uncertain backdrop for the housing market as the year progressed, overall demand was resilient although there were some regional variations in output. The fundamentals of the housing market continued to be attractive due to a prolonged period of under supply. Strong underlying demand is supported by an aspiration for home ownership, a competitive mortgage market, a low interest rate environment and the Help to Buy scheme.

Raw materials price increases were recovered in a competitive market and the gross margin was maintained. The decline in volumes and a modest increase in operating costs contributed to a small decline in operating profit.

High levels of service were supported by maintaining the number of silos placed on customers sites at last year's record levels. A number of planned plant refurbishment projects were delivered on schedule while maintaining overall plant output at normal levels. The plants remain well invested and it is planned to modernise and upgreade the ERP system over the course of the next two years.

Operating Review - Discontinued Operations

Belgium Merchanting & Plumbase Business

* Change represents the movement pre IFRS 16 adjustments

On 1 October 2019 the Group completed the disposal of Plumbase, the specialist UK plumbing and heating business, to Plumbing and Heating Investments Limited ("PHIL"), a UK company engaged in the distribution of plumbing and heating products, for an enterprise value of £66.75 million. After allowing for adjustments for debt-like items and working capital, the net cash proceeds and receivables due were £62.5 million. The sale of Plumbase to PHIL secures future opportunities for Plumbase, its employees and other stakeholders as part of an enlarged specialist plumbing and heating business. This transaction represented a very positive outcome for Grafton and enables it to continue to focus its capital and resources on growth opportunities.

Plumbase generated operating profit of £6.0 million on revenue of £258.0 million for the year ended 31 December 2018.

On 7 October 2019, the Group completed the sale of its Belgium merchanting business for an enterprise value of £11.0 million to an affiliate of Aurelius Equity Opportunities SE & Co. KGaA, a private equity firm listed in Germany. Freehold properties with a book value of £8.8 million were retained by Grafton as part of the transaction and are expected to be sold in due course. The overall business was valued at circa £28.0 million including £4.5 million realised from the disposal of the St. Vith branch in October 2018.

The Belgian merchanting business generated operating profit of £0.8 million in 2018 on revenue of £91.6 million.

Financial Review

The Group achieved a good set of results for the year supported by excellent cash generation. Pre-IFRS 16 cash flow from operations was £219.1 million (2018: £209.2 million) and the Group ended the year with pre-IFRS 16 net cash on the balance sheet of £7.8 million having started the year with net debt of £53.1 million.

Revenue

Group revenue from continuing operations increased by 2.7 per cent to £2.67 billion (2018: £2.60 billion) and by 2.9 per cent in constant currency. Volume and price growth of 1.9 per cent in the like-for-like business increased revenue by £46.4 million. Acquisitions and new branches contributed revenue of £76.6 million and revenue was reduced by £47.5 million from the disposal of two small non-core UK businesses in 2018 and by branch consolidations. A currency translation loss due to sterling weakness against the euro reduced revenue by £6.3 million.

Adjusted Operating Profit

Adjusted operating profit of £194.3 million (2018: £187.6 million) increased by 3.6 per cent due to increased profitability in the merchanting businesses in Ireland and the Netherlands and in the retailing business in Ireland. Property profit was also higher and operating profit before property profit increased by 2.6 per cent to £187.4 million (2018: £182.7 million). The adjusted operating profit margin increased by 10 basis points to 7.3 per cent and was unchanged at 7.0 per cent excluding property profit.

Property

The disposal of surplus properties generated cash proceeds of £15.6 million (2018: £9.1 million) and a profit of £6.9 million (2018: £4.9 million). The proceeds were deployed to generate higher returns elsewhere in the business.

Net Finance Income and Expense

The pre-IFRS 16 net finance expense increased by £1.1 million to £6.0 million (2018: £4.9 million). This primarily related to a £1.2 million increase in interest payable on borrowings to £7.1 million (2018: £5.9 million). The increase was due to the issue of unsecured senior notes with ten and twelve year maturities in the US Private Placement market in September 2018 at an attractively priced annual coupon of 2.5 per cent.

The proceeds of loan notes raised in the US Private Placement in 2018 were used to refinance bank debt which attracted a lower interest rate based on short term money market rates for the euro plus a bank margin. These notes extended the maturity profile of the Group's debt and provided certainty over the cost of debt for ten and twelve year notes.

The net finance expenses included a foreign exchange translation gain of £1.2 million which compares to a loss of £0.2 million last year.

Taxation

The income tax expense of £28.7 million (2018: £29.6 million) is equivalent to an effective tax rate of 16.6 per cent on profit from continuing operations (2018: 17.0 per cent). This is a blended rate of corporation tax on profits in the various jurisdictions where the Group operates and is slightly lower than the rate of 17.7 per cent guided at the time of our Interim Results due to higher than anticipated reliefs and allowances in the UK.

The tax rate for the Group is most sensitive to changes in the UK rate of corporation tax which is currently 19 per cent. Legislation was passed in 2016 to reduce this rate by two percent to 17 per cent with effect from 1 April 2020. This reduction is now expected to be put on hold and the 2016 legislation amended to maintain the rate at its current level of 19 per cent. As a consequence, the corporation tax rate for 2020 will increase to circa 19.5 per cent to reflect a once-off increase in the deferred tax liability if the legislation is amended as anticipated.

Capital Expenditure and Investment in Intangible Assets

Gross capital expenditure was £50.4 million (2018: £66.7 million) and there was also a spend of £2.1 million (2018: £6.9 million) on computer software that is classed as intangible assets. Proceeds of £17.4 million (2018: £10.9 million) were received on disposal of fixed assets and the investment on capital expenditure and intangible assets net of disposal proceeds was £35.1 million (2018: £62.7 million).

The total spend on development capital expenditure was £23.1 million (2018: £34.1 million) of which almost half was incurred by Selco on new stores, upgrading the existing Selco estate and the opening of a new delivery-hub in London. Development projects in the Netherlands included the opening of the Isero distribution centre in Waddinxveen, branch upgrades and a new branch in Almere. The Group also opened two new Leyland SDM stores and upgraded Chadwicks and Woodie's stores in Ireland.

Asset replacement capital expenditure of £27.3 million (2018: £32.7 million) compares to the pre-IFRS 16 depreciation charge for the year of £44.2 million and related principally to replacement of the distribution fleet that supports delivered revenue, replacement of equipment, forklifts, plant and tools for hire by customers and other assets required to operate the Group's branch network.

An investment of £2.1 million (2018: £6.9 million) was made on the new IT platform in Buildbase and on other software development projects.

Pensions

The IAS 19 deficit on defined benefit pension schemes was £21.2 million at 31 December 2019, an increase of £1.0 million from £20.2 million at 31 December 2018. The return on scheme assets of £230.7 million, at 1 January 2019, was 15.0 per cent or £34.7 million. These gains were mainly offset by an actuarial loss on scheme liabilities due to changes in financial assumptions. There was a significant drop in the discount rates used to discount scheme liabilities in line with declines in corporate bond rates. The rate used to discount UK liabilities fell by 80 basis points to 2.10 per cent and the rate used to discount Irish liabilities fell by 75 basis points to 1.05 per cent.

Net Debt

The Group started the year with net debt of £53.1 million and ended the year with pre-IFRS 16 net cash of £7.8 million. The Group remains in a very strong financial position with pre-IFRS 16 EBITDA interest cover of 39.9 times (Year ended 31 December 2018: 46.6 times). The Group's policy is to maintain its current investment grade credit rating while investing in organic developments and acquisition opportunities that are expected to generate attractive returns and maintain a progressive dividend policy.

Financing 

The Group had bilateral loan facilities of £476.7 million with six relationship banks at 31 December 2019. The amount drawn on these facilities was £205.3 million. The Group had debt obligations of £136.1 million from the issue of unsecured senior notes in the US Private Placement market.

The average maturity of the committed bank facilities and unsecured senior notes at 31 December 2019 was 4.6 years.

The Group's key financing objective continues to be to ensure that it has the necessary liquidity and resources to support the short, medium and long term funding requirements of the business. At 31 December 2019 the Group had undrawn bank facilities of £271.4 million (31 December 2018: £356.8 million) and cash balances and deposits of £348.8 million (31 December 2018: £223.0 million). These resources together with strong cash flow from operations provide good liquidity and the capacity to fund investment in working capital, routine capital expenditure and development activity including acquisitions.

The Group's gross debt is drawn in euros and provides a hedge against exchange rate risk on euro assets in the businesses in Ireland and the Netherlands.

IFRS 16 Leases

On 1 January 2019, the Group implemented IFRS 16 Leases, which replaces IAS 17 Leases. The new standard brings most leases on to the balance sheet for lessees and eliminates the distinction between operating and finance leases. Under IFRS 16, a lessee recognises a right-of-use asset and a lease liability. The right-of-use asset is treated in a similar way to a non-financial asset and is depreciated. The lease liability is initially measured at the present value of the stream of lease payments over the lease term, discounted at the incremental borrowing rate.

IFRS 16 has changed the measurement of many aspects of the Group's accounts including operating profit, earnings per share, net debt and return on capital employed.

All leases except for leases with a duration of less than one year and low value assets are recognised on the balance sheet as lease liabilities. The corresponding right of use asset is an amount equal to the lease liability on transition, adjusted for any prepaid or accrued lease payments and any onerous lease provision.

The Group implemented IFRS 16 from 1 January 2019 by applying the modified retrospective approach meaning that the comparative figures in the financial statements for the year ended 31 December 2019 are not restated to show the impact of IFRS 16.

The operating leases that are recorded on the balance sheet for the first time principally relate to merchanting and DIY branch properties, office buildings, cars and distribution vehicles. The Group decided to reduce the complexity of implementation by availing of a number of practical expedients on transition on 1 January 2019.

On initial application of IFRS 16, the Group recognised assets and liabilities for leases previously classified as operating leases under IAS 17. This resulted in the recognition of right-of-use assets of £561.7 million and lease liabilities of £574.9 million. Further details of the impact of the initial application of IFRS 16 on 1 January 2019 are disclosed in note 22.

The adoption of IFRS 16 reduced profit before tax by £9.1 million and profit after tax by £7.6 million for continuing operations. It should be noted that the overall impact on the Income Statement of adopting IFRS 16 will be neutral over the life of a lease but will result in a higher charge in the earlier years following implementation and a lower charge in the later years. The overall effect on profit before tax is expected to be neutral after approximately four to five years, then becoming positive moving towards the end of the leases.

The right-of-use asset in the balance sheet at 31 December 2019 was £522.2 million and lease liabilities were £543.4 million.

IFRS 16 does not change overall cashflows or the economic effect of the leases to which the Group is a party. Similarly, there is no effect on Grafton's existing banking covenants as a result of the implementation of IFRS 16.

Shareholders' Equity

The Group's balance sheet strengthened with shareholders' equity up by £66.1 million. Profit after tax increased shareholders' equity by £119.2 million. Shareholders equity was reduced by the payment of dividends in the amount of £44.0 million and the buy-back of 664,961 shares to offset the dilutive effect of share awards at a cost of £6.1 million. Other movements decreased shareholders' equity by a net £3.0 million.

Return on Capital Employed

Return on Capital Employed reduced by 30 basis points to 14.4 per cent (2018: 14.7 per cent). The decline reflects a weaker performance in the UK merchanting business and increased investment in the Netherlands business.

Principal Risks and Uncertainties

The primary risks and uncertainties affecting the Group are set out on pages 48 to 51 of the 2018 Annual Report and will be updated in the 2019 Annual Report. These risks are expected to remain the same for the remainder of the year, subject to the comments in the outlook on Brexit.

Grafton Group plc

Group Income Statement

For the year ended 31 December 2019

Grafton Group plc

Group Statement of Comprehensive Income

For the year ended 31 December 2019

Grafton Group plc - Group Balance Sheet as at 31 December 2019

Grafton Group plc - Group Cash Flow Statement

For the year ended 31 December 2019

Grafton Group plc - Group Statement of Changes in Equity

Grafton Group plc

Notes to Final Results for the year ended 31 December 2019

1. General Information

Grafton Group plc ("Grafton" or "the Group") is an international distributor of building materials to trade customers who are primarily engaged in residential repair, maintenance and improvement projects and house building.

The Group has leading regional or national market positions in the merchanting markets in the UK, Ireland and the Netherlands. Grafton is also the market leader in the DIY retailing market in Ireland and is the largest manufacturer of dry mortar in Great Britain.

The Group's origins are in Ireland where it is headquartered, managed and controlled. It has been a publicly quoted company since 1965 and its Units (shares) are quoted on the London Stock Exchange where it is a constituent of the FTSE 250 Index and the FTSE All-Share Index.

The financial information presented in this preliminary release does not constitute full statutory financial statements. The Final Results Announcement was approved by the Board of Directors. The annual report and financial statements will be approved by the Board of Directors and reported on by the auditors in due course. Accordingly, the financial information is unaudited. The Annual Report for the year ended 31 December 2018 has been filed with the Irish Registrar of Companies. The audit report on those statutory financial statements was unqualified.

Basis of Preparation, Accounting Policies and Estimates

(a) Basis of Preparation and Accounting Policies

The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRS') issued by the International Accounting Standards Board ('IASB') as adopted by the European Union ('EU'); and those parts of the Companies Act 2014 applicable to companies reporting under IFRS.

The financial information in this report has been prepared in accordance with the Group's accounting policies. Full details of the accounting policies adopted by the Group are contained in the consolidated financial statements included in the Group's Annual Report for the year ended 31 December 2018 which is available on the Group's website; www.graftonplc.com.

The accounting policies and methods of computation and presentation adopted in the preparation of the Group financial information are consistent with those described and applied in the annual report for the year ended 31 December 2018, except for those noted below. The financial information includes all adjustments that management considers necessary for a fair presentation of such financial information. All such adjustments are of a normal recurring nature. Certain tables in the financial information may not add precisely due to rounding.

(b) Estimates

In preparing the Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2018. Actual results may differ from estimates calculated using these judgements and assumptions.

Basis of Preparation, Accounting Policies and Estimates (continued)

Impacts of standards and interpretations in issue but not yet effective

Certain new accounting standards and interpretations have been published that are not mandatory for the current reporting period and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the current or future reporting periods or on transactions in the foreseeable future.

Impacts of standards effective from 1 January 2019

IFRS 16 - Leases (effective date: financial year beginning 1 January 2019)

IFRS 16 introduces significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, with a practical expedient for short-term leases and leases of low value assets.

The Group has applied IFRS 16 using the modified retrospective approach from 1 January 2019, without restatement of the comparative information and the Group has elected to measure its right of use assets arising from leases using the approach set out in IFRS 16.C8(b)(ii).

The Group has a large number of property, vehicle and equipment leases as well as a small number of leases where the Group acts as a lessor. The standard has a material impact on the presentation of the Group's accounts with the recognition of lease liabilities and right of use assets. The overall impact on the Income Statement of adopting IFRS 16 will be neutral over the life of a lease but will result in a higher charge in the earlier years following implementation and a lower charge in the later years.

Further details on the impact of adopting IFRS 16 are set out in note 20 to these financial statements and in the bridges that are contained within the APM's.

Identification of leases

The identification of leases involves judgement as IFRS 16 defines a lease as a contract (or part of a contract) that, for a period of time in exchange for consideration, conveys the right to:

• control an identified asset;

• obtain substantially all economic benefits from use of the asset; and

• direct the use of the asset

The Group has availed of the practical expedient available on transition to IFRS 16 not to reassess whether a contract is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and the guidance in IFRIC 4 will continue to be applied to those leases entered into or modified before 1 January 2019.

Lease term

The lease term is the non-cancellable period for which the Group has the right to use an underlying asset together with:

• periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option; and

• periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option.

This assessment involves the exercise of judgement by the Group.

Initial measurement of lease liability

The lease liability is initially measured at the present value of the lease payments that are payable for the lease term, discounted using the incremental borrowing rate. The Group's weighted average (by lease liability) incremental borrowing rate applied to lease liabilities as at 1 January 2019 was 3.5%.

Lease payments included in the measurement of the lease liability comprise:

• fixed lease payments (including in-substance fixed payments)

• variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

• the amount expected to be payable by the lessee under residual value guarantees (e.g. if the fair value of the asset at the end of the lease term is below an agreed amount, the lessee would pay to the lessor an amount equal to the difference between the fair value and agreed amount);

• the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

• payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability does not include variable elements which are dependent on external factors, e.g. payments that are based on turnover. Instead, such variable elements are recognised directly in the income statement.

Judgements applied include determining the lease term for those leases with termination or extension options and the discount rate used which is based on the incremental borrowing rate. Such judgements could significantly impact the lease term, the resultant lease liability and right of use asset recognised.

Where a lease agreement contains a clause to restore the asset to a specified condition i.e. dilapidation costs, the Group recognises a provision for dilapidations under IAS 37 in its balance sheet.

Initial measurement of right of use asset

The right-of-use asset comprises the amount of the initial measurement of the lease liability, adjusted for:

• any lease payments made at or before the commencement date, less any lease incentives

• any initial direct costs incurred by the Group

In addition, where the Group subleases a headlease (or part thereof) to a third party and such sublease is deemed by the Group to be a finance sublease, the right of use asset relating to sublease is derecognised and a finance lease receivable is recognised.

Subsequent measurement of lease liability

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:

• the lease term has changed or there is a change in the assessment concerning the exercise of an option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

• the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used).

• a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The Group did not make any material adjustments outlined above during the periods presented.

Subsequent measurement of right of use asset

After initial measurement, the right of use assets are measured at cost less accumulated depreciation, adjusted for:

• any impairment losses in accordance with IAS 36 Impairment of Assets

• any remeasurement of the lease liability.

Right-of-use assets are depreciated over the shorter period of the lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset that reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.

Lease modifications

A lease modification is a change to the original terms and conditions of the lease. The effective date of the modification is deemed to be the date when both parties agree to a lease modification.

A lease modification is accounted for as a separate lease if:

• the modification increases the scope of the lease by adding the right to use one or more underlying assets; and

• the consideration for the lease increases by an amount commensurate with the standalone price for the increase in scope of the lease.

If both criteria are met, the Group adopts this accounting policy on the initial recognition and measurement of lease liabilities and right-of-use assets.

If a change in the lease terms does not meet the test outlined above, the Group must modify the initially recognised components of the lease contract.

Sublease accounting

Where the Group acts as a lessor, the sublease is classified as a finance lease or an operating lease.

A lease is deemed to be a finance lease where the lease transfers substantially all the risks and rewards incidental to the ownership of the underlying asset. Otherwise, the lease is deemed to be an operating lease.

Where the Group subleases an asset, it accounts for its interests in the head lease and the sublease separately. If the head lease is not a short-term lease or low-value lease and the sublease is deemed to be a finance lease, the Group recognises a lease liability relating to the head lease but does not recognise a corresponding right of use asset. Instead, the Group recognises a finance lease debtor relating to the sublease.

IFRIC 23 - Uncertainty over Income Tax Treatments (effective date: beginning 1 January 2019)

This IFRIC did not have a material impact on the Group in the current year.

Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement (effective date: beginning 1 January 2019)

This amendment did not have a material impact on the Group in the current year.

2. Segmental Analysis

The amount of revenue and operating profit under the Group's reportable segments of Merchanting, Retailing and Manufacturing is shown below. Segment profit measure is operating profit before exceptional items and amortisation of intangible assets arising on acquisitions. The impact of IFRS 16 "Leases" on the individual CGU's is set out in Note 22 and within the APM's.

2. Segmental Analysis

The amount of revenue by geographic area is as follows:

*Service revenue, which is recognised over time, amounted to £35.9 million for the year (2018: £38.3 million)

Segment assets and liabilities for 2019 increased as a result of the adoption of IFRS 16 "Leases". Lease liabilities are now included in segment liabilities, whereas finance lease liabilities were previously excluded from segment liabilities.

Operating segment assets are analysed below:

Operating segment liabilities are analysed below:

3. Operating Profit

The property profit of £6.9 million (2018: £4.9 million) relates to the disposal of seven properties in the UK and three properties in Ireland (2018: seven UK properties and two Irish properties).

4. Finance Expense and Finance Income

* Net bank/loan note interest of £6.0 million (2018: £4.9 million). Including interest on lease liabilities, this amounts to £25.8 million (2018: £5.1 million).

5. Earnings per Share

The computation of basic, diluted and underlying earnings per share is set out below.